Editing Simulation (section)

===Payment and securities settlement system===
Simulation techniques have also been applied to payment and securities settlement systems. Among the main users are central banks who are generally responsible for the oversight of market infrastructure and entitled to contribute to the smooth functioning of the payment systems.

Central banks have been using payment system simulations to evaluate things such as the adequacy or sufficiency of liquidity available ( in the form of account balances and intraday credit limits) to participants (mainly banks) to allow efficient settlement of payments.<ref>Leinonen (ed.): Simulation studies of liquidity needs, risks and efficiency in payment networks (Bank of Finland Studies E:39/2007) [http://pss.bof.fi/Pages/Publications.aspx Simulation publications] {{Webarchive|url=https://archive.today/20120714010331/http://pss.bof.fi/Pages/Publications.aspx |date=14 July 2012 }}</ref><ref>Neville Arjani: Examining the Trade-Off between Settlement Delay and Intraday Liquidity in Canada's LVTS: A Simulation Approach (Working Paper 2006–20, Bank of Canada) [http://pss.bof.fi/Pages/Publications.aspx Simulation publications] {{Webarchive|url=https://archive.today/20120714010331/http://pss.bof.fi/Pages/Publications.aspx |date=14 July 2012 }}</ref> The need for liquidity is also dependent on the availability and the type of netting procedures in the systems, thus some of the studies have a focus on system comparisons.<ref>Johnson, K.; McAndrews, J.; Soramäki, K. 'Economizing on Liquidity with Deferred Settlement Mechanisms' (Reserve Bank of New York Economic Policy Review, December 2004)</ref>

Another application is to evaluate risks related to events such as communication network breakdowns or the inability of participants to send payments (e.g. in case of possible bank failure).<ref>H. Leinonen (ed.): Simulation analyses and stress testing of payment networks (Bank of Finland Studies E:42/2009) [http://pss.bof.fi/Pages/Publications.aspx Simulation publications] {{Webarchive|url=https://archive.today/20120714010331/http://pss.bof.fi/Pages/Publications.aspx |date=14 July 2012 }}</ref> This kind of analysis falls under the concepts of [[stress testing]] or [[scenario analysis]].

A common way to conduct these simulations is to replicate the settlement logics of the real payment or securities settlement systems under analysis and then use real observed payment data. In case of system comparison or system development, naturally, also the other settlement logics need to be implemented.

To perform stress testing and scenario analysis, the observed data needs to be altered, e.g. some payments delayed or removed. To analyze the levels of liquidity, initial liquidity levels are varied. System comparisons (benchmarking) or evaluations of new netting algorithms or rules are performed by running simulations with a fixed set of data and varying only the system setups.

An inference is usually done by comparing the benchmark simulation results to the results of altered simulation setups by comparing indicators such as unsettled transactions or settlement delays.